In June 2019, consumer debt in the United States grew by 4.3 percent to $4.1 trillion, breaking the previous month’s record of $4.09 trillion. The majority of non-revolving American debt is linked to education and auto loans. During the same time period, credit card debt totaled $1.072 trillion and accounted for approximately 26 percent of all debt.
What happens when a family who lives paycheck to paycheck experiences a job loss, a medical emergency, or the need or urgent vehicle repairs? If you are someone who could be sent into a downward financial spiral by just one of these situations, you may want to consider bankruptcy as an option.
Filing for bankruptcy is not a decision anyone should arrive at without thought and consideration. In addition, you should be sure to hire a bankruptcy attorney in Atlanta to determine whether you meet the requirements and to ensure you obtain the maximum benefit possible if you do choose to file.
Should You File Chapter 7 Bankruptcy?
Bankruptcy is a process that will take time. If your income exceeds certain limits, you may not qualify for Chapter 7 bankruptcy, but a Chapter 7 bankruptcy might be a good idea if :
- Your total debts amount to more than half your annual income
- It would take a minimum of five years to pay off your debt completely, even if you took extreme measures to do so
- Your debt interferes with other essential aspects of your life, such as your relationships and your enjoyment of life
- You have little to no disposable income
- Your monthly income is below the median income level in Georgia
Chapter 7 Income Limits
By meeting and reviewing your financial situation and records with an Atlanta bankruptcy lawyer, you could find out if you meet specific bankruptcy qualifications. The bankruptcy means test is used to determine if a debtor’s income is low enough for them to qualify for a Chapter 7 bankruptcy or if they will need to file a Chapter 13 bankruptcy instead.
The means test is used to prevent high-income debtors from filing Chapter 7 and being relieved of their debts altogether when they the income to pay for some or all of their debts over time.
Learning that there is an income limit may send some debtors into a panic; however, those that qualify to file a Chapter 7 do not have to be penniless to do so. In fact, some debtors earn a significant income and still qualify due to their expenses and taxes.
There is no set limit of how much a debtor can earn to be eligible for a Chapter 7 bankruptcy; instead, a standard formula is applied to each individual debtor. Without using the means test, you will not be able to know for sure whether or not you qualify for a Chapter 7 bankruptcy.
The Chapter 7 Bankruptcy Means Test
The means test was designed to determine who should be able to pay their debts and who might not be able to and to accurately apply income limits to every debtor wanting to file for bankruptcy. It deducts certain monthly expenses from your current monthly income (calculated by your average income over the last six months before you actually file for bankruptcy) to determine your disposable income.
Debtors who have a higher disposable income are less likely to qualify to file for a Chapter 7 bankruptcy, although a Chapter bankruptcy is generally still an option. Those with income that cause them to fail the means test are expected to file a Chapter 13 bankruptcy instead to use their disposable income to pay back their creditors what they can. It is essential to note that those filing bankruptcy who have mostly consumer debts and not business debts are required to take the means test.
The first requirement of the means test is to figure out if your income is more or less than the median income for your state of residency. If you are a debtor who earns more than the median, you will then need to determine if you will have enough money after paying certain expenses to pay your creditors anything.
Having precise information nearby when completing the means test is helpful. You will need to know:
- Your last six months of income
- What your spouse makes, including commissions and bonuses
- The amount of your car payments and how much you spend on gas
- How much you spend on childcare
- Student loan payments and other tuition
- Work-related expenses such as uniforms
- Housing, utilities, transportation expenses
- Income tax information
IRS Expense Standards
When it comes to certain expenses, you do not need to calculate the specific expenses to you or your family. Instead, to determine how much potential bankruptcy filers should be able to claim for some of their expenses, the IRS expense standards are used for:
- Housekeeping supplies
- Apparel and services
- Personal care products and services
These expense standards vary depending on the size of your household and where you live.
When Debtor Income is More Than the Median
Debtors who determine that their household is less than the median income for the size of their family in Georgia pass the means test and do not need to complete any further calculations to determine their eligibility. They can file Chapter 7 bankruptcy.
On the other hand, if your household income is higher than the state median, more complicated calculations must be completed to make a determination. If it is enough, your disposable income, which is what is left after you pay your allowed monthly expenses, can be used to pay off at least some of your unsecured debt, such as credit card bills. As mandated by the bankruptcy court, this will force you to file a Chapter 13 if you choose to proceed with a bankruptcy filing.
If you pass the means test, it does not necessarily mean that you will be able to file Chapter 7 bankruptcy. The bankruptcy court will consider Schedule I: Your Income and Schedule and J: Your Expenses. If the court finds that you have enough disposable income remaining based on these schedules, they can convert your bankruptcy from a Chapter 7 to a Chapter 13.
Keep in mind that even if you qualify for Chapter 7 by the means test, it does not automatically mean you should file.
It only means that you have a legal right. You should discuss your case with an experienced bankruptcy attorney to learn more about your alternatives. Remember that no matter what type of bankruptcy you file, you will be required to meet individual requirements such as credit counseling. Additionally, your credit reports may not look great for several years.
Failing the Means Test
If you do not pass the means test, a Chapter 13 will be your only option for bankruptcy. This type of bankruptcy requires you to make regular monthly payments during a three or five year time period. The monthly payments will be paid to their bankruptcy trustee whose job it is to ensure that the money gets distributed appropriately to their creditors.
Chapter 13 debtors must make their payments on time and stick to a strict budget. Any changes to their income or financial situation such as a raise, a job loss, a bonus, an income tax return, and even an inheritance must be reported as soon as possible to their trustee and could change the amount of their monthly bankruptcy payments.
Debtors who have filed for a Chapter 13 may find it the ideal way to hand specific financial issues such as mortgage arrears and paying for debts that are not dischargeable in bankruptcy, such as taxes, child support, and most student loans. No matter which type of bankruptcy you file, remember that it will reflect in your credit reports.
Let a Skilled Atlanta Bankruptcy Attorney Help You Get a Fresh Start
The means test and other requirements for filing bankruptcy can often be confusing and overwhelming for people who are looking for financial relief. The good news is that there is help available at our firm.
We can help you determine if you qualify for a Chapter 7 bankruptcy and, if not, whether a Chapter 13 bankruptcy would work for your financial needs. If you are ready to get your bankruptcy case started, one of our experienced Atlanta bankruptcy lawyers can help. Call our office today at 404-476-8644 to schedule your bankruptcy consultation with one of our dedicated Cornwell attorneys or complete our online contact form. Get the fresh start you need with a free consultation today!